Margin Account

B is correct. This recommendation is unsuitable for multiple reasons: (1) Sarah's "moderate" risk tolerance conflicts with the aggressive strategy of using maximum leverage on a volatile biotech stock—margin amplifies both gains and losses. (2) Her 2-3 year timeline for a house down payment requires capital preservation, not speculation with borrowed money. (3) A single volatile stock violates diversification principles. (4) Margin accounts charge interest, reducing net returns. The IAR's fiduciary duty requires recommending against this strategy and suggesting suitable alternatives aligned with her actual risk tolerance and timeline.

A is incorrect because meeting financial qualifications does not make a margin account suitable. suitability requires alignment with risk tolerance, investment objectives, and time horizon. Sarah's moderate risk tolerance and specific 2-3 year goal for a house down payment make leveraged speculation unsuitable. C is incorrect because limiting margin usage to 25% does not resolve the fundamental suitability issues. the strategy still involves leverage, concentration risk (single volatile stock), and conflicts with her stated moderate risk tolerance and timeline. D is incorrect because suitability obligations cannot be waived. even if Sarah signs a risk disclosure, the IAR must not recommend unsuitable investments. A waiver does not satisfy fiduciary duty or suitability requirements.

C is correct. Regulation T, established by the Federal Reserve, requires a minimum initial margin of 50% of the purchase price. This means investors must deposit at least 50% in cash or eligible securities when purchasing securities on margin, and can borrow the remaining 50% from the broker-dealer.

A is incorrect because 25% is the FINRA minimum maintenance margin requirement (the minimum equity that must be maintained AFTER purchase), not the initial margin requirement at the time of purchase. B is incorrect because 30% is a common firm-specific maintenance margin requirement (higher than the 25% regulatory minimum), but it is not the Regulation T initial margin requirement. D is incorrect because 75% exceeds the regulatory requirement. while firms may set higher initial margin requirements, Regulation T requires only 50%.

A is correct. Calculate equity and percentage:

Initial Position:
- Total purchase: $40,000
- Investor deposit (50% initial margin): $20,000
- Loan from broker: $20,000

After Decline to $30,000:
- Current market value: $30,000
- Loan amount (unchanged): $20,000
- Current equity: $30,000 - $20,000 = $10,000
- Equity percentage: ($10,000 ÷ $30,000) × 100 = 33.3%

Margin Call Analysis:
Minimum maintenance margin is 25%. The account has 33.3% equity, which is ABOVE the 25% minimum, so NO margin call is triggered.

B is incorrect: the calculation is wrong. At $30,000 market value with a $20,000 loan, equity is $10,000 (33.3%), not 25%. C and D contain calculation errors. C incorrectly calculates equity as $6,000 (20%), and D incorrectly calculates equity as $5,000 (16.7%). The correct equity is $10,000 (market value $30,000 minus loan $20,000).

C is correct (the EXCEPT answer). This statement is completely FALSE. Margin accounts do NOT eliminate downside risk. in fact, they AMPLIFY risk. If the market value of securities falls below the loan amount, the investor owes more than the securities are worth and must deposit additional funds. The broker does NOT absorb losses beyond the initial deposit. the investor is responsible for the full loan amount regardless of how much the securities decline in value. Margin accounts can result in losses exceeding the initial investment.

A is accurate: Margin accounts allow borrowing from the broker-dealer, with the purchased securities serving as collateral for the loan. B is accurate: Federal Reserve Regulation T requires 50% initial margin, meaning investors must deposit at least half the purchase price. D is accurate: Margin accounts charge interest on borrowed amounts, typically calculated daily and compounded. This interest expense reduces net investment returns and must be factored into suitability analysis.

B is correct. Statements 1, 2, and 4 are accurate.

Statement 1 is TRUE: Using "maximum allowable leverage" under Regulation T means 50% initial margin. For a $60,000 purchase, the investor must deposit 50% = $30,000, borrowing the other $30,000 from the broker.

Statement 2 is TRUE: Current equity = Market Value - Loan = $42,000 - $30,000 = $12,000. The loan amount remains constant at $30,000 while the market value declined to $42,000.

Statement 3 is FALSE: To determine if a margin call occurred, calculate equity percentage: ($12,000 ÷ $42,000) × 100 = 28.6%. This is ABOVE the 25% minimum maintenance margin, so NO margin call is triggered. The account would need to fall below $40,000 market value before a margin call occurs ($40,000 × 25% = $10,000 minimum equity, versus $10,000 equity if market value = $40,000 and loan = $30,000).

Statement 4 is TRUE: If the securities continue declining, the investor could lose more than the initial $30,000 investment. For example, if the securities become worthless ($0 market value), the investor still owes the $30,000 loan plus accumulated interest. Margin accounts can result in losses exceeding the initial investment because the investor is responsible for repaying the full borrowed amount regardless of security performance.